As the leaders of the European Union gathered for an emergency summit on Thursday night, momentum was already moving toward imposing tough new sanctions on Russia over its invasion of Ukraine.
After a perfunctory debate, the presidents and prime ministers quickly approved sanctions on Russian President Vladimir Putin, Foreign Minister Sergey Lavrov and some of Russia’s biggest banks. Talk of barring Russia from the global financial messaging system known as SWIFT, however, stalled amid skepticism on the part of Scholz and the leaders of Austria, Italy and Cyprus, according to officials familiar with the deliberations who spoke on the condition of anonymity to discuss the sensitive negotiations.
Then Ukrainian President Volodymyr Zelensky dialed into the meeting via teleconference with a bracing appeal that left some of the world-weary politicians with watery eyes. In just five minutes, Zelensky — speaking from the battlefield of Kyiv — pleaded with European leaders for an honest assessment of his country’s ambition to join the European Union and for genuine help in its fight with the Russian invaders. Ukraine needed its neighbors to step up with food, ammunition, fuel, sanctions, all of it.
“It was extremely, extremely emotional,” said a European official briefed on the call. “He was essentially saying, ‘Look, we are here dying for European ideals.’” Before ending the video call, Zelensky told the gathering matter-of-factly that it might be the last time they saw him alive, according to a senior European official who was present.
Just that quickly, Zelensky’s personal appeal overwhelmed the resistance from European leaders to imposing measures that could drive the Russian economy into a state of near collapse. The result has been a rapid-fire series of developments boosting Ukraine’s fight to hold off the Russian military and shattering the limits on European assertiveness in national security affairs.
The actions culminated on Saturday, when the United States, Canada, the United Kingdom and the European Union announced they would bar several major Russian banks from the global financial messaging system known as SWIFT, crack down on Russian oligarchs, and prevent the Russian Central Bank from bailing out the domestic economy.
The unprecedented moves led Russians to crowd ATMs in a desperate bid to withdraw cash and sparked a furious response from Putin, who called them “illegitimate” and ordered his nuclear forces to a higher state of alert.
Surprised by the unusually rapid European decision, the White House scrambled over the weekend to catch up in drafting its own related measures, according to one American and one European official. The latest sanctions mean the Western allies are effectively waging financial war against Russia, matching Moscow’s military offensive in Ukraine with attacks on the foundation of a $1.5 trillion economy.
“We’re not going to fight with bullets. We’re going to choke them financially,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.
American and European officials were expected to make public details of the new sanctions late Sunday, before financial markets open in Asia. But even before they have taken effect, the Russian financial system is wobbling. The ruble, which already was near a historic low against the dollar, plunged in informal trading in Moscow. “The Russian ruble has been crushed and it’s going to get crushed further,” said Chandler.
On Sunday, the fraying of Russian ties with the global economy accelerated. The European Union closed its airspace to Russian aircraft and announced it would fund the purchase of weapons for the first time in what European Commission President Ursula von der Leyen called a “watershed moment.”
The oil giant BP said it would “exit” its nearly 20 percent stake in the Russian energy company Rosneft. Two directors from BP, chief executive Bernard Looney and former executive Robert Dudley, have resigned from the Rosneft board. FedEx and United Parcel Service also announced they have suspended shipments to Russia.
On Saturday, the credit ratings agency Standard & Poor’s cut the Russian government debt rating to “junk.” That will force the managers of some Western investment funds to dump their holdings and will likely raise borrowing costs for major Russian corporations as well.
After a slow start earlier last week that drew criticism from Republicans, the Western sanctions campaign is closing like a vise on the Russian economy.
“There’ll be a huge sudden spike in the cost of living, a huge change in the availability of imported products, including medicine and technology, and a huge jolt to the economic power structure,” said Adam Posen, president of the Peterson Institute for International Economics. “You are essentially directing a financial crisis in another country.”
Since the United States and Europe imposed less comprehensive sanctions in 2014 following the Russian takeover of Ukraine’s Crimean Peninsula, Putin has stockpiled foreign exchange reserves and shifted away from the dollar.
It was a costly strategy. Even as the Russian Central Bank accumulated $630 billion in reserves, up from just $356 billion in 2015, Putin presided over average annual economic growth of just 0.8 percent. Russia sold off most of its U.S. treasury securities in recent years and bulked up on gold, which now accounts for 20 percent of its total reserves, according to the Institute for International Finance.
But Russia would need to sell that gold for dollars, euros or yen before it could use those reserves to support the ruble. And the sanctions, which Japan joined on Sunday, make that impossible. “It’s still legal tender, but you can’t spend it,” said Posen, a former member of the Bank of England’s policymaking committee.
For millions of Russians, the looming economic calamity threatens to turn the clock back. Russians have a visceral memory of the country’s 1998 financial crisis, when Moscow devalued the ruble and defaulted on its foreign debt. The economic blow wiped out the savings of millions of people.
As a result of the 1998 crisis, many Russians hold their savings in dollars or euros. But according to the Levada Center polling group, only 32 percent of Russians had savings as of October. Because Russians are paid in rubles, the value of their salaries in real terms stands to drop dramatically.
Putin has long presented his rule as the stable alternative to the chaos of the 1990s. In an interview two years ago with the Russian state news agency Tass, Putin said that during the 2008 global financial crisis, he thought, “What I will not allow is a repeat of the 1998 situation, when all citizens completely lost their savings.”
In 2014, Russia’s first invasion of Ukraine coincided with a precipitous drop in oil prices. In December of that year, Moscow faced a currency crisis that saw the ruble plummet and forced the Russian Central Bank to raise its key interest rate from below 11 percent to 17 percent in a single day.
Since then, Russia has tried to build an economy that is less dependent on imports, particularly in the food sector, to soften the blow of such shocks. But Russia largely doesn’t manufacture consumer products such as cars, electronics, computers and appliances, leaving consumers vulnerable to sudden price hikes as the ruble sinks.
If it does, the seeds of Russia’s latest economic catastrophe will have been sown over the past week, as European officials gradually faced a reckoning. At the same time, President Biden, when asked during a news conference why the West had not taken action to lock Russia out of SWIFT, replied, “Right now, that’s not the position that the rest of Europe wishes to take.”
The increased popular demand for a strong response, including by kicking Russia out of SWIFT, and Biden calling out Europe “really ramped up the pressure” to act, said one person familiar with the discussions, who spoke on the condition of anonymity to discuss sensitive matters. Without SWIFT, Russian institutions will be forced to fall back on a telex network and other less convenient and more costly alternatives.
One European official said that there had been “uninterrupted communication” between the technocrats of the European Commission and the White House in recent days as they tried to coordinate the complex choreography of the sanctions measures.
The official said that Europeans are trying to hit Russia with sanctions that are tough enough to bite without provoking a wider war. “Everyone understands this is a situation that has conflict potential and that has to be taken into account,” the official said.
Rick Noack contributed to this report.